LC disputes – is DOCDEX the answer?

I am not sure I would read this if I were you. It might take
away you illusions. On the other hand - it might also offer ideas that you
perhaps had not thought about ... And with that cryptic introduction we move to
the topic of this blog post: LC disputes..

On a number of occasions I have stated that the LC is a
strong and powerful instrument – if used correctly. I.e. drafted well. However
– even the most perfectly drafted LC can become the subject of a dispute. This
may be anything; from refusal of a presentation based on spurious
discrepancies; or simply stalling payment forever – without responding to any
contacts from the presenter or beneficiary. And then what do you do? Of course
there are a number of paths to take to solve LC disputes. For example:

By arguments

If the counterpart is simply wrong, the starting point is to
argue why they are wrong. The LC practice is well documented (e.g. in UCP 600,
ISBP and ICC Opinions), and most disputes can be solved with the basis in the
existing practice. However the existing practice is not law … it is not binding
on the parties. I have been involved in a number of disputes where the
counterpart simply stated that they “do not endorse” the ICC Opinions or that
“the LC is not issued subject to the ISBP.”

In other words: you may be right, but if the counterpart is
not on the same playing field as you – one million ICC Opinions in your favour
will not help you!

By relations

However – your relations may actually help you. If you know
the right person – preferably having actually met – then things may be
smoother. In some countries the LC handling is very decentralised, and if the
dispute is with a branch, it may be fruitful to “move” it (if at all possible)
to the head office. The LC Head in the head office may well be more “receptive”
to UCP 600/ISBP/ICC Opinions arguments than is the case in a branch. Further –
by using relations the case becomes “broader,” and may include the full
co-operation between you and your counterpart. Assuming that both want to
preserve it – a solution to a “single case” may be easier.

By the commercial agreement

More often than not the real subject of the dispute is not
the problem in the LC. For example the presentation may be refused citing the
discrepancy “Bill of lading not signed correctly.” This may or may not be
correct, but the subject for the dispute is most likely based on the commercial
agreement – e.g. one party (for example the buyer) is of the opinion that the
other party (for example the seller) have not fulfilled the commercial
agreement. This may (again as an example) be in respect of the quality of the
goods. Only rarely the signing of a B/L causes real problems.

In these cases good customers – i.e. customers that have the
desire to be “helpful” – are indeed valuable. More often than not – the best
solution to any dispute is between the commercial parties. If they agree – then
most likely the case can be solved in a good way. If they have a real
disagreement, a solution may be difficult indeed.

By court action

When all attempts are exhausted court action may be the last
resort. A customer of mine told me recently that he always have a sum of money
ready to be used to solve disputes, as he would be prepared to go to great
lengths to avoid going to court. Going to court is “one long line of bad” … It
is expensive – even if you win; and it takes long time – and perhaps worst of
all: It takes away focus from what should be the primary focus: running your
business. So for sure: court action should really be the last resort…

So what else is there? There are of course other measures.
One of the first that falls into mind is arbitration; i.e. an alternative
dispute resolution – outside the courts. This may of course work well, but the
challenge is that this is normally built into the agreement between the
commercial parties. The LC banks are not part of the commercial agreement; so a
dispute under the LC that involves one or more of the LC banks is not well
suited for arbitration…

So what to do? I think that one idea to consider carefully
is DOCDEX. DOCDEX is ICC’s Documentary Instruments Dispute Resolution
Expertise. DOCDEX offers international bankers and traders means to settle
trade finance disputes. The cases are usually solved in two to three months.
The standard fee is US$5000. In other words: Really fast and really cheap
compared to court action!

The DOCDEX cases are decided by a panel of three impartial
experts, whose decision is further scrutinized by the technical advisor of the
ICC Banking Commission to ensure that it conforms to applicable ICC Rules and
their interpretation by the ICC Banking Commission.

BUT – and there is a but; the decisions are binding only if
both parties have so agreed. There are many examples where one part submits a
case to DOCDEX – and the counterpart has not added their view – and most likely
is not prepared to.

So at best the DOCDEX decision can be used as evidence in
the court case to follow. It would however be preferable if going to court can
be avoided.

And in fact – in many cases – it can. The issuing bank can
build a “DOCDEX Clause” into the LC – or for that matter guarantee (as demand
guarantees subject to URDG 758 can also be handled by the DOCDEX system). This
would be a clause stating that any dispute under the LC (Subject to article 1 of
the DOCDEX Rules) must be decided by the DOCDEX system. This would have many
advantages. Basically the issuing bank signals in a strong way that they
respect the instrument and international practice – and are willing to solve
disputes based on this. This means that other banks will be more willing to
accept the risk on such bank. And if there is a dispute – it has been agreed
how to go about it! An LC or guarantee with a DOCDEX Clause should make the
banks and beneficiary a bit more secure and calm in respect of the issuing
bank.

Chang-Soon Thomas Song who is First Expert, Attorney at Law,
Trade and Services Division at Korea Exchange Bank writes a bi-weekly column in
a Korean trade journal. In this he has elaborated over the benefit of inserting
a DOCDEX clause in the LC. It is available here in Korean language:

If Korean is not your strongest (!!) Mr. Song has generously
accepted that the English translation is published in www.lcviews.com - so the
article titled “Dispute Resolution with Documentary Dispute Expertise Decision”
is available in the article section:

http://www.lcviews.com/index.php?blog_id42

It is great – and hereby highly recommended! Happy reading.

I conclude this blog post by informing you that I have
recently been notified that a large international bank has issued their first
bank guarantee (subject to URDG 758), which included a DOCDEX Clause. Hurrah
for that bank!!